Understanding Your Homeowners Insurance Policy

insurance coverage for damage to your home

As a damage restoration company, we see firsthand the hardship that comes with experiencing damage to your home.

We have years of experience working with insurance carriers and navigating insurance policies and coverage. 

Because of this, we know how important it is to understand what kind of coverage you have for your home in the event of a damage causing event.

What is a policy?

First, what is a policy? A policy is “the contract form issued by the company to explain the coverage provided. It is a legal document” (Insurance.Illinois.gov).

Why is my policy important? Unfortunately, damage does happen. We have first-hand experience with the unforeseen disasters that happen to people’s homes every day. When this damage occurs, your insurance policy provides coverage for the costs associated with the damage.

What is covered? Your insurance policy will outline COVERED PERILS. Covered perils are the specific damage causing events that your insurance policy covers.

What about exclusions? Exclusions are “specific situations or circumstances listed in your policy describing when benefits will not be paid. Typical homeowners insurance exclusions are earthquake, sewer backup/sump pump failure, ordinance or law, and intentional loss.” (Insurance.illinois.gov).

What about my deductible? A deductible is “the dollar amount you must pay out-of-pocket for each claim before the insurance company begins paying” (insurance.illinois.gov). 

  • For example, your deductible may be $2,500. The deductible is the first $2,500 of a claim. So, anything above and beyond that amount, up to your limit of liability, will be covered by your insurance carrier.
 

What is the Limit of Liability? The limit of liability is the maximum coverage amount. In other words, it is the maximum amount of money your insurance carrier will pay out in the event of a covered loss.

“Unfortunately, damage does happen. We have first-hand experience with the unforeseen disasters that happen to people’s homes every day.”

Breaking Down Your Insurance Policy

 A policy is broken down into different coverages, each with their own coverage amount.

Coverages

Coverage A – Structure. The repair or replacement of the dwelling (or house). 

  • This coverage depends on the type of insurance policy you have. There are two types of policies: Actual Cash Value vs. Replacement Cost Value.
    • Actual Cash Value is “replacement cost less depreciation, considering the age and condition of your property” (Inurance.illinois.gov). In short, an Actual Cash Value policy will provide coverage for the cost of your property at the time of the damaging event. In other words, this type of policy factors in depreciation, or the decreased value over time.
    • Replacement Cash Value is “a determination of the cost to replace contents, rebuild your home, or repair damages with materials of like kind and quality, without subtracting depreciation” (insurance.illinois.gov). In other words, this type of policy will pay to replace the property you lost without factoring in any decreased value over time.

 

Coverage B – Other Structures. The repair or replacement of any “outbuildings” and “fixtures” attached to the land such as detached garages, sheds, pools, driveways, fences, patios, etc.

Coverage C – Personal Property.“If you turn your house upside down, whatever falls out is your personal property.”

  • In short, it covers items such as furniture, clothes, electronics, makeup, accessories, etc. 
    • *This coverage can vary see Explaining Coverage Amounts below.*

 

Coverage D – Loss of Use. Also referred to as Additional Living Expenses or ALE. It covers any living expenses associated with being displaced from your home. 

  • For example, it covers things like rent for temporary housing, hotel expenses, extra travel expenses to get to work or school, etc.

 

Ordinance and Law – Rider. It is something additional that you can add to your coverage, but that is not typically included in your policy. Ordinance and Law coverage includes the costs associated with upgrades due to changes in city codes or ordinances. 

  • What are city codes? City or municipality codes dictate guidelines for buildings and homes. Therefore, if your home is an older structure there may be new codes that have to be met during the restoration process.
    • For example, things like electrical and plumbing may have to be changed and upgraded. Coverage A does not generally include costs associated with code updates. Regardless, in order to repair your home, the city or municipality will require these updates. 

 

Coverage E – Personal Liability. The costs of claims or suits brought against the insured for damages that cause bodily injury or property damage to another individual.

  • For Example, someone slips and falls, breaking their leg inside your home. If this individual decides to sue, personal liability coverage will generally cover the costs associated with the claims brought against the insured. Also, personal Liability coverage will often cover injuries inflicted on another person by your dog.

 

How Does Coverage Work?

In this example...

Coverage A is 100% of the insurance policy amount or $200,000.00 for the repair or replacement of the dwelling’s structure. 

Coverage B is typically 10% of Coverage A or $20,000.00 for the repair or replacement of other structures like sheds, fences, and other outbuildings. 

Coverage C varies but can be upwards to 50% of Coverage A or $100,000.00 to repair or replace persona property. 

  • Prior to deciding how much personal property coverage you need it is a good idea to try to value all the personal property in your home.*
    • Additionally, if you have personal property items of high value, such as jewelry, antiques, and artwork, you may also want to consider adding a Floater to your policy.
      • A floater provides additional coverage for those personal property items that may otherwise not be included under your normal homeowners policy.

*See Our Home Inventory Worksheet for more info.

Coverage D varies but is the maximum amount your insurance carrier will pay out for things like rent if you are displaced. 

  • This coverage is very important because being displaced from your home can become costly depending on the duration of your displacement.
  • For instance, if you are displaced due to a fire in your home you can be out of your home for a year or even longer during the restoration process.
    • As an example, if you must rent a home during this time and the rent is $2,000 a month – you are looking at a cost of $24,000 for a year of rent. 
    •  

Ordinance and Law (Rider) is typically up to 10% of Coverage A or $20,000.00 allotted for required code updates. 

*This is a highly recommended rider for your insurance policy.*

 

Note: For questions about your specific policy or coverage needs, consult with your insurance agent. 

*You can view a sample HO3 Homeowners Insurance Policy on the Insurance Information Institute’s website at https://www.iii.org/sites/default/files/docs/pdf/HO3_sample.pdf

Source: Insurance Information Institute (iii.org)

Illinois Department of Insurance (insurance.illinois.gov).